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How much of my income should be spent on a car loan?

Deciding how much of your income should go towards your car loan depends on a number of factors. Many people love driving, whereas for others it’s a means of getting from A to B. Once your loan is approved, the decision to borrow the full figure is ultimately yours.

If you’ve always dreamed of owning a certain model or specific vehicle, you might want to commit more of your income to spending on a car loan - whereas for some, loan affordability takes priority.

If you’re unsure about how much you should plan on spending on a car loan, contact Positive Lending Solutions who have decades of experience dealing helping people to find the right car loan to suit their financial situation.

Consider your cash flow

When mapping your car loan repayments it can be helpful to create budget spreadsheet: a document that records your income and routine expenditure. This will give you a tangible idea on what you can spend on your car loan.

Be sure not to underestimate your expenses, as it could leave you in a tight spot moving forward. Most budget spreadsheets take these key factors into consideration:

Housing

Vehicle

Fuel and power

Food and drink

Medical

Recreational

Finding balance

If you’re trying to decide how much of your monthly income should be spent on a car loan, it’s important to remember to keep things balanced.

Never stretch yourself financially or put yourself under financial stress by committing to car loan repayments that aren’t in line with your income and which aren’t realistic for your monthly budget.

The general rule of thumb is to aim to spend no more than 35% of your income on a car loan – so if you’re earning $30,000 a year you’ll be looking at spending a maximum of $10,500 on your car loan. 35% is a pretty significant part of your income so really make sure that you’re spending for the right reasons.

If cars don’t interest you at all and you simply need a method of transport, you could consider reducing this amount to around 10% of your income, less if you want to. Remember though that buying the cheapest car possible could be a false economy – especially if it’s used or second hand. Make sure you don’t end up with unexpected repair and maintenance costs.

You could opt for the middle ground. Many people meet somewhere in the middle and spend around 20% of their income on a car loan – this is a good compromise and means you can invest in a car loan and a vehicle that is of a high standard but doesn’t break the bank.

Paying less for your car loan

At Positive Lending Solutions, we’ll always help you to find the best deal for your car loan. Whatever your circumstances, there are always ways to pay less for your car loan – often all it takes is a little extra time and some expertise.

Avoid loans that sound too good to be true – it’s probably because they are. If payments seem too low to you, you’re probably right and may find yourself paying levels of interest that are much higher than necessary.

Ask for expert help – Positive Lending Solutions have teams of expert brokers who can quickly and easily find the best loans for you. They have access to a wide range of lenders and so can always find car loan deals at a good price.

Consider loan terms and interest rates – there’s no point going for a really long loan term just because you’ll pay less interest. Equally, some short loan terms have very high interest rates. Get calculating and figure out which is really the best car loan option for you.

If you’re struggling to find the right car loan for you, always ask for help. Not only could you save time and money but you’ll also enjoy the peace of mind that you’re receiving advice from the experts.

Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.